By Russ Brien

Section 1402 of the recent economic stimulus legislation, the American Recovery and Reinvestment Act of 2009, creates a new category of tax-exempt bonds called “Tribal Economic Development Bonds”. Up to $2 billion of these bonds may be issued. The amount which any individual Indian tribal government will be allocated will be determined by the Secretary of the Treasury in consultation with the Secretary of the Interior. Therefore, the Treasury Department will need to promulgate new regulations implementing this allocation procedure before tribal governments will be able to take advantage of this new tool.

Unlike other tax-exempt bonds which may be issued by tribal governments, tribes do not have to use the proceeds of tribal economic development bonds for an essential governmental function. Similarly, these bonds are not subject to the significant restrictions regarding private activity bonds which apply to other tribal tax-exempt bond issues. A private activity bond is one in which the governmental issuer serves as a conduit to provide financing to a nongovernmental person.

Proceeds of tribal economic development bonds may not be used to finance buildings or other properties in which Class II or Class III gaming is housed or conducted. Also, such proceeds may not be used to finance any facility located outside of an Indian reservation.

To the extent that an issuance does not qualify as a “tribal economic development bond”, the previous requirements with respect to essential governmental functions and private activity continue to apply. Accordingly, the pending Treasury Department rulemaking on the definition of “essential governmental function” remains relevant.

The legislation does not address the other significant legal hurdle facing tribes wishing to issue tax-exempt bonds. Currently state and municipal issuers enjoy an exemption from registration and public disclosure under the federal securities laws. The new legislation does not extend this exemption to tribal government issuers. Accordingly, tribal issuers continue to face higher costs of issuance and additional disclosure requirements due to this disparity.

The most immediate challenge, which cannot be addressed by legislation or regulation, is the source of repayment. Tribal issuers, like any potential tax-exempt bond issuer, must identify an adequate unencumbered revenue stream which can be dedicated to repayment of the bonds. These revenue streams could take many forms, including tax revenues, special assessments, mineral lease royalties, or distributions from tribal business enterprises. For struggling tribes, perhaps the best opportunity to utilize this new tool is to issue private activity bonds in order to successfully compete with state and municipal governments to entice private employers to locate on the reservation.

Russ Brien is an attorney who represents tribal, corporate, municipal and individual clients on a variety of issues involving tribal and federal Indian law, with an emphasis on economic development, infrastructure and doing business in Indian country.